Chapter 6

perfectly elastic supply

even a tiny increase or reduction in the price will lead to very large changes in the quantity supplied. the PES is infinite- horizontal line

perfectly elastic

horizontal demand curve, infinite price elasticity of demand. *any price increase will cause the quantity demanded to drop to 0

what does the sign of the income elasticity of demand tell us?

if it's positive- the good is a normal good- the quantity demanded at any given price increases as income increases if its negative- the good is an inferior good- the quantity demanded at any given price decreases as income increases

what is the effect of a price increase for unit-elastic?

it doesn't change total revenue because the price effect and quantity effect exactly offset each other

how is cross-price elasticity measured?

it's size is a measure of how closely substitutable the two goods are

how does law and demand apply with price and quantity

law of demand says that demand curves are downward sloping. so price and quantity demanded always move in opposite directions

how does the availability of inputs effect the price elasticity of supply?

the PES is small when inputs are difficult to obtain, can be shifted into and out of production only at relatively high cost. ex: cell phone frequencies the PES is large when inputs are readily available and can be shifted into and out of production at a relatively low cost

what is the difference between price elasticity of demand and price elasticity of supply?

the only difference between the two is we consider movement along the supply curve rather than along the demand curve

perfectly inelastic supply

the price elasticity of supply is zero-changes in price of the good have no effect on the quantity supplied... vertical line

what does the sign of a cross-price tell us?

the sign tells us whether two goods are complements or substitutes

what does the size of the cross-price tell us?

the size of the cross-price between two complements tells us how strongly complementary they are: slightly below 0=weak complements very negative=strong complements

total revenue

total value of sales of a good or service price x quantity sold = total revenue

cross-price elasticity of demand

(between 2 goods) measures the effect of the changes in 1 goods price on the quantity demanded of the other good. %change in quantity of A demanded / %change in price of B

perfectly inelastic

0 price elasticity of demand, demand curve is a vertical line

what factors determine the price elasticity of supply?

1) the availabilit of inputs 2) time

4 factors that determine the price elasticity of demand

1) whether close substitutes are available 2) whether the good is a necessity or a luxury 3) share of income spent on the good 4) time

what happens to the price elasticity of demand when two goods are substitutes?

Ex: hot dogs and hamburgers a rise in the price of hot dogs increases the demand for hamburgers. if close substitutes, positive and large. if not close, positive and small

how does time affect the price elasticity of demand?

PED increases as consumers have more time to adjust to a price change long run PED often higher than short-run elasticity Ex: significant gasoline price raise in 1980s

what is the difference in the price elasticity of demand if the good is a necessity or luxury?

PED is low if its a necessity ex: life-saving medicine PED is high if its a luxury- something you could easily live without

how does the 'share of income' a good represents affect the price elasticity of demand?

PED is low when spending on a good accounts for a small amount of consumers' income. PED is high when good accounts for significant share of consumers' spending- the consumer is likely to be very responsive to a change in price

what effect does time have on price elasticity of supply?

PES grows larger as producers have more time to respond to price change-->long-run PES is often higher than short-run elasticity

midpoint method

[(Q2-Q1)/((Q1+Q2)/2)]/[(P2-P1)/((Q2+Q1)/2)]

price elasticity of supply

a measure of the responsiveness of the quantity of a good supplied to the price of that good =% change in quantity supplied/% change in price

price effect

after a price increase, each unit sold sells at a higher price, which tends to raise revenue

quantity effect

after a price increase, fewer units are sold, which tends to lower revenue

% change in price

change in price/initial price x 100

% change in quantity demanded

change in quantity demanded/initial quantity demanded x 100

which types of goods tend to be income-elastic?

luxury goods!

income elasticity of demand

measure of how much the demand for a good is affected by changes in consumers' income =(% change in quantity demanded)/(% change in income)

elasticity

measure of responsiveness to changes in prices or incomes

price elasticity of demand

measures the responsiveness of the quantity demanded to changes in price (% change in quantity demanded)/(% change in price) x100

which types of goods tend to be income-inelastic?

necessities such as food and clothing

what is the effect of substitutes on the price elasticity of demand?

price elasticity of demand is high if there are other goods that consumers would be willing to consume, and low if there are no close substitutes

inelastic

price elasticity of demand<1

elastic

price elasticity of demand>1

income-elastic

when income rises, demand for income-elastic goods rises faster than income the income elasticity of demand for that good>1

income-inelastic

when income rises, the demand for income-inelastic goods rises, but more slowly than income the IED for that good is positive, but <1

inelastic demand

when quantity demanded will fall by a relatively small amount when price rises

unit-elastic demand

when the price elasticity of demand = 1

highly elastic

when the price elasticity of demand is large... when consumers change their quantity demanded by a large percentage compared with the percent change in the price

what happens to the price elasticity of demand when two goods are complements?

when two goods are complements, the cross-price elasticity of demand is negative - a rise in the price of hot dogs decreases the demand for hot dog buns